Renowned investor Peter Lynch highlighted the importance of understanding the business behind a stock before investing. Lynch, celebrated for his successful tenure at Fidelity Investments, shared his investment insights during a speech in 1997.
Lynch advised investors, "If you can't explain to an 11-year-old in two minutes or less, why you own the stock, you shouldn't own it." This principle aligns with Warren Buffett's investment approach, which advocates investing in areas of personal expertise.
Lynch rejected the concept of economic forecasting, describing himself as a "bottom-up" investor who focuses on individual stocks through thorough company and industry analysis.
"Understanding the business behind the stock is the most important principle of investing in the stock market. This is why Buffett only invests into what he understands and what falls in his circle of competence. I buy stuff like Dunkin Donuts, Stop and Shop and made money on them," Lynch said during the speech.
He also emphasized the role of patience in investing, suggesting that significant returns could be achieved even a decade after a company's initial public offering. He cited Walmart as an example, noting that investing is a marathon, not a sprint.